UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2010
[ ] Transition report pursuant section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to ____________
Commission File Number: 000-53166
MUSCLEPHARM CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 77-0664193
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
4721 Ironton Street, Denver, CO 80239
(Address of Principal Executive Offices)
(800) 210-7369
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the issuer has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. NOT APPLICABLE
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On November 5, 2010, there
were 63,451,577 Common Shares issued outstanding.
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer", "accelerated
filed" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
MUSCLEPHARM CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated financial statements (unaudited):
Balance Sheets 3
Statements of operations 4
Statements of cash flows 5
Statement of stockholders' deficit 6
Notes to unaudited consolidated financial statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 28
Signatures 29
2
PART I. FINANCIAL INFORMATION
MUSCLEPHARM CORPORATION
Consolidated Balance Sheets
September 30, December 31,
2010 2009
------------- ------------
ASSETS (Unaudited)
Current assets
Cash $ 10,657 $ -
Accounts receivable, net of allowance of
$7,592 and $821, respectively 556,345 111,476
Inventory 186,027 4,245
Deposits on product 36,600 32,115
Prepaid expenses and other current assets 25,476 76,686
------------ ------------
Total Current Assets 815,105 224,522
Fixed assets, net 59,380 39,815
Other assets 54,933 2,665
------------ ------------
Total Assets $ 929,418 $ 267,002
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 2,014,170 $ 765,534
Accrued liabilities 469,509 103,519
Bank overdrafts - 17,841
Customer deposits 55,474 15,018
Due to related parties 46,529 85,820
Notes payable 808,290 459,864
------------ ------------
Total Current Liabilities 3,393,972 1,447,596
------------ ------------
Stockholders' Deficit
Series A convertible preferred stock, $.001
par value, 833,333 shares authorized, 10,402
and 0 shares issued and outstanding 10 -
Common stock, $.001 par value, 195,000,000
shares authorized, 50,329,260 and 26,000,000
shares issued and outstanding 50,330 26,000
Additional paid in capital 9,031,141 1,099,508
Services prepaid with common stock (564,703) -
Accumulated deficit (10,981,332) (2,306,102)
------------ ------------
Total Stockholders' Deficit (2,464,554) (1,180,594)
------------ ------------
Total Liabilities and Stockholders'
Deficit $ 929,418 $ 267,002
============ ============
The accompanying notes are an integral part of these financial statements.
3
MUSCLEPHARM CORPORATION
Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2010 2009 2010 2009
------------ --------- ----------- -----------
Sales of product, net $ 1,409,016 $ 232,488 $ 3,135,712 $ 669,345
Cost of sales 927,506 247,628 2,120,113 530,653
----------- --------- ----------- -----------
Gross Margin 481,510 (15,140) 1,015,599 138,692
Operating Expenses:
Advertising and promotion 1,143,663 379,893 4,199,173 737,107
Salaries and benefits 279,026 77,892 1,434,730 149,436
Professional fees 1,024,149 72,554 2,208,554 90,611
General and administrative 178,440 67,478 437,488 168,413
Research & Development 129,500 - 129,500 -
Depreciation and amortization 4,375 1,656 10,830 4,968
----------- --------- ----------- -----------
Total Operating Expenses 2,759,153 599,473 8,420,275 1,150,535
----------- --------- ----------- -----------
Operating Loss (2,277,643) (614,613) (7,404,676) (1,011,843)
----------- --------- ----------- -----------
Other Expenses
Interest expense 231,739 4,669 900,886 8,608
Other expense 364,472 - 369,668 -
----------- --------- ----------- -----------
Total Other Expense 596,211 4,669 1,270,554 8,608
----------- --------- ----------- -----------
Net Loss $(2,873,854) $(619,282) $(8,675,230) $(1,020,451)
=========== ========= =========== ===========
Basic and diluted loss per
share $ (.08) $ (.02) $ (.28) $ (.04)
Weighted average shares
outstanding, basic and
diluted 35,923,947 25,962,921 30,473,190 25,885,841
The accompanying notes are an integral part of these financial statements.
4
MUSCLEPHARM CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
2010 2009
------------- -------------
Operating Activities:
Net Loss $(8,675,230) $(1,020,451)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 10,830 4,968
Allowance for bad debt 6,771 5,631
Amortization of debt discount and debt
issue costs 714,430 -
Non-cash interest expense 126,000 -
Loss on extinguishment of debt 402,739 -
Loss on sale of accounts receivable 51,644 -
Gain on settlement of payables (84,715) -
Common stock issued for services 3,582,595 -
Stock based compensation expense 630,990 -
Cash provided by (used in) changes in
operating assets and liabilities:
Accounts receivable (730,131) (1,742)
Inventory (181,782) 51,569
Deposits on products (4,485) 45,815
Prepaid expenses and other current assets 49,417 11,231
Other assets (52,268) (1,207)
Accounts payable 1,333,351 301,326
Accrued liabilities 411,141 50,688
Customer deposits 40,456 112,731
Due to related parties (39,291) 5,515
----------- -----------
Net cash used in operating activities (2,407,538) (433,926)
----------- -----------
Investing Activities:
Purchases of fixed assets (30,395) (5,510)
----------- -----------
Net cash used in investing activities (30,395) (5,510)
----------- -----------
Financing Activities:
Proceeds from issuance of notes payable 1,259,000 346,711
Proceeds from issuance of common stock 1,005,692 -
Proceeds from sale of accounts receivable 226,847 -
Capital contributions - 87,500
Payments for recapitalization from merger (25,108) -
Bank overdrafts (17,841) 5,193
----------- -----------
Net cash provided by financing
activities 2,448,590 439,404
----------- -----------
Net decrease in cash 10,657 (32)
Beginning cash - 32
----------- -----------
Ending cash $ 10,657 $ -
=========== ===========
Non-cash Investing and Financing Activities:
Beneficial conversion features on
convertible notes payable $ 426,000 $ -
Conversions of convertible debt and accrued
interest $ 564,037 $ -
Settlement of debt and accrued interest
through issuance of common stock $ 678,325 $ -
Conversion of preferred stock $ 73 $ -
The accompanying notes are an integral part of these financial statements.
5
MUSCLEPHARM CORPORATION
Consolidated Statement of Changes in Stockholders' Deficit
(Unaudited)
Services
Prepaid
Additional With
Preferred Stock Common Stock Paid-in Common Accumulated
Shares Amount Shares Amount Capital Stock Deficit Total
-------- ------ ---------- -------- ----------- ---------- ------------- -----------
Balance, January 1, 2010 - $ - 26,000,000 $26,000 $1,099,508 $ - $ (2,306,102) $(1,180,594)
Recapitalization resulting
from merger 83,333 83 70,838 71 (25,262) - - (25,108)
Surrender of common stock
for re-distribution - - (2,425,000) (2,425) 2,425 - - -
Common stock re-issued for
services - - 2,425,000 2,425 1,307,075 (270,000) - 1,039,500
Common stock issued for
services - - 2,941,215 2,941 2,834,857 (633,423) - 2,204,105
Conversions of convertible
notes payable - - 1,821,029 1,821 562,216 - - 564,037
Beneficial conversion features
on convertible notes payable - - - - 426,000 - - 426,000
Common stock issued for notes
payable extensions - - 130,000 130 95,370 - - 95,500
Common stock issued for
settlement of notes payable - - 1,965,571 1,966 1,079,098 - - 1,081,064
Common stock issued with notes
payable - - 50,000 50 30,450 - - 30,500
Conversion of preferred
stock (72,931) (73) 14,586,200 14,586 (14,513) - - -
Issuance of common stock
for cash - - 2,764,407 2,765 1,002,927 - - 1,005,962
Amortization of prepaid
services - - - - - 338,720 - 338,720
Stock based compensation - - - - 630,990 - - 630,990
Net loss - - - - - - (8,675,230) (8,675,230)
------- ------ ---------- ------- ---------- --------- ------------- -----------
Balance, September 30, 2010 10,402 $ 10 50,329,260 $50,330 $9,031,141 $(564,703) $(10,981,332) $(2,464,554)
======= ====== ========== ======== ========== ========= ============ ===========
The accompanying notes are an integral part of these financial statements.
6
MUSCLEPHARM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
On February 18, 2010, in accordance with a Securities Exchange Agreement
dated February 1, 2010, Tone in Twenty, a Nevada Corporation, acquired all
the outstanding equity and voting interests of Muscle Pharm, LLC
("MusclePharm"), a Colorado limited liability corporation formed on April 22,
2008), for an aggregate of 26,000,000 shares of our common stock. In
addition, pursuant to the terms and conditions of the Securities Exchange
Agreement ("share exchange"), MusclePharm paid $25,000 to the former
president of Tone in Twenty for his 366,662 shares of common stock, and these
shares were cancelled. Upon closing of the transaction, MusclePharm became a
wholly owned subsidiary of Tone in Twenty. Also concurrent with the closing
of the acquisition, the Tone in Twenty's President and Director issued his
resignation. The board of directors was reconstituted to consist of the two
original founders and initial members of MusclePharm. Following the share
exchange and related transactions, a total of 26,070,838 shares of Tone in
Twenty's common stock was issued and outstanding, with MusclePharm members
owning approximately 99.7% of the outstanding common stock. The share
exchange is being accounted for as a "reverse acquisition," as the members of
MusclePharm owned a majority of the outstanding shares of Tone in Twenty
common stock immediately following the share exchange and now control the
board of directors. Tone in Twenty was deemed to be the legal acquirer in
the reverse acquisition, while MusclePharm was deemed to be the accounting
acquirer. Also, as a result of the completion of the reverse acquisition,
Tone in Twenty amended its articles of incorporation to change its name to
MusclePharm Corporation (the "Company"), and also changed its fiscal year
from August 31 to December 31. Upon completion of the share exchange, the
operations of Tone in Twenty ceased.
The Company currently manufactures and markets eight branded sports nutrition
products with the trade name: Combat Powder[R], Assault[TM], Battle
Fuel[TM], Bullet Proof[R], Shred Matrix[TM], Recon[R], Energel Shot[TM] and
MuscleGel[TM].
The consolidated financial statements are presented as a continuation of the
financial statements of MusclePharm. As such, for all disclosures
referencing shares authorized, issued, outstanding, per share amounts and
other disclosures related to equity, amounts have been retroactively adjusted
to reflect the legal capital of the legal acquirer (Tone in Twenty).
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America ("U.S. GAAP") for interim financial information and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and disclosures
required by U.S. GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 2010, are not necessarily
indicative of the results that may be expected for the year ending December
31, 2010. The balance sheet at December 31, 2009, has been derived from the
audited financial statements at that date but does not include all of the
information and disclosures required by U.S. GAAP for complete financial
statements. For further information, refer to the financial statements and
7
notes thereto included in the Company's Annual Report on Form 8-K for the
year ended December 31, 2009.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in
understanding the Company's financial statements. The financial statements
and notes are representations of the Company's management who is responsible
for their integrity and objectivity. These accounting policies conform to US
GAAP and have been consistently applied in the preparation of the financial
statements.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared on the
basis of U.S. GAAP and include the accounts of the Company and its subsidiary.
Intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reported period.
Actual results could differ materially from those estimates. The Company's
significant estimates made in connection with the preparation of the
accompanying financial statements include allowance for doubtful accounts,
value of long lived assets and the valuation of stock options and warrants.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include highly liquid
investments with original maturities of 90 days or less. Those are readily
convertible into cash and not subject to significant risk from fluctuations
in interest rates and market trends. The recorded amounts for cash
equivalents approximate fair value due to the short-term nature of these
financial instruments.
CONCENTRATION OF CREDIT RISK AND ACCOUNTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk include cash equivalents, trade accounts
receivable, inventory and deposits on product. The Company maintains its
cash and investment balances in the form of bank demand deposits and money
market accounts with financial institutions that management believes to be of
high credit quality. Accounts receivable are typically unsecured and are
derived from transactions with customers primarily located in the United
States. For the nine months ended September 30, 2010, the Company had made
sales to 30 customers. Six of these customers represent approximately 84% of
the Company's gross sales during this period.
At September 30, 2010, the Company was using two vendors to manufacture the
Company's inventory.
8
ACCOUNTS RECEIVABLE
The Company performs ongoing evaluations of its customer's financial
condition and generally does not require collateral. Management reviews
accounts receivable periodically and reduces the carrying amount by a
valuation allowance that reflects management's best estimate of amounts that
may not be collectible. Allowances, if any, for uncollectible accounts
receivable are determined based upon information available and historical
experience.
INVENTORY
Inventory is stated at the lower of cost or market. Costs are determined by
the first-in first-out or average cost methods. Cost includes all costs of
purchase, cost of conversion and other costs incurred in bringing the
inventory to its present location and condition.
SHIPPING AND HANDLING
Product sold is typically shipped directly to the customer from the
manufacturer and distributor. Any freight billed to customers is offset
against shipping costs and included in cost of goods sales.
FIXED ASSETS
Fixed assets are stated at cost less accumulated depreciation. Included in
fixed assets are website development costs which represent capitalized costs
of design, configuration, coding, installation, and testing of the Company's
website. Depreciation is computed on the straight-line method over the
asset's useful lives which range from three to five years. Maintenance and
repairs are charged to expense as incurred; improvements and betterments are
capitalized.
LONG-LIVED ASSETS
The Company's primary long-lived assets are fixed assets. The Company
assesses the recoverability of its long-lived assets whenever events and
circumstances indicate the carrying value of an asset or asset group may not
be recoverable from estimated future cash flows expected to result from its
use and eventual disposition. Management does not believe that its long-lived
assets are impaired, and no impairment charges have been recorded as of
September 30, 2010.
FAIR VALUE MEASUREMENT
Financial instruments consist of cash, accounts receivable, inventory,
deposits on product, prepaid expenses, accounts payable and accrued expenses.
The carrying amount of these financial instruments approximates fair value
due to their short-term nature or the current rates at which the Company
could borrow funds with similar remaining maturities. Unless otherwise noted,
it is management's opinion that the Company is not exposed to significant
interest, currency or credit risks arising from these financial statements.
STOCK BASED COMPENSATION
ASC Topic 718, "Stock Compensation," establishes fair value as the
measurement objective in accounting for share based payment arrangements, and
9
requires all entities to apply a fair value based measurement method in
accounting for share based payment transactions with employees. Stock-based
compensation cost is measured at the grant date based on the fair value of
the award and is recognized as expense on a straight-line basis over the
period during which the holder is required to provide services in exchange
for the award, i.e., the vesting period.
ADVERTISING
The Company expenses the cost of advertising when incurred. Advertising
expenses are included with advertising and promotions in the accompanying
consolidated statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of a revenue
arrangement exists, delivery has occurred, the sales price is fixed or
determinable, and collectability is reasonably assured.
The Company has been developing its presence in the marketplace and
establishing distribution channels for its products, and therefore the
Company has incurred significant costs for sales allowances, and discounts
provided. For the three and nine months ended September 30, 2010, the Company
recorded discounts and allowances of $43,338 and $128,247 respectively. For
the three and nine months ended September 30, 2009, the Company recorded
discounts and allowances of $29,998 and $232,721, respectively.
SPONSORSHIP AND ENDORSEMENT AGREEMENTS
As a component of its marketing strategy, the Company enters into sponsorship
and endorsement agreements with prominent athletes, trainers, and other high
profile individuals that provide the Company ongoing sources of exposure to
its products. The agreements sometimes specify certain contingencies that
must be met to receive payments; others may require regular or periodic
payments with no specified service or events that trigger payments under an
agreement, or a combination of both. Agreements that are contingent upon the
successful completion of an event prior to payment are considered unearned
until the completion of the triggering event, and as such, no expense or
liability is recorded until the successful completion of the triggering
event. Where agreements are based on time and not on specific triggering
events, the services are considered to be earned ratably over the period of
the agreement, and as such expenses and liabilities are recorded ratably over
the term of the agreement.
INCOME TAXES
As discussed elsewhere in this report, on February 18, 2010 the Company
completed a reverse merger with Tone in Twenty which had a fiscal year ending
August 31. MusclePharm is deemed to be the accounting acquirer in the
merger, while Tone in Twenty is deemed the legal acquirer. As such, the
combined entity subsequently changed the fiscal year end to December 31. As
a result of the reverse merger, the Company will be subject to corporate U.S.
federal, state, and local taxes beginning in February 2010. The Company is
currently evaluating the effects of the reverse acquisition to its income
taxes.
10
EARNINGS PER COMMON SHARE
Basic earnings (loss) per share is computed by dividing the net income (loss)
attributable to common shareholders for the period by the weighted average
number of common shares outstanding during the period. Diluted loss per
share is computed based on the weighted average number of common shares and
potentially dilutive common shares outstanding. The calculation of diluted
net income (loss) per share excludes potential common shares if the effect
would be anti-dilutive. Potential common shares consist of incremental common
shares issuable upon the exercise of outstanding stock options and stock
purchase warrants or other financial instruments considered to be common
stock equivalents.
At September 30, 2010 the Company had common stock equivalents of 6,700,362
which are excluded from the calculation of diluted loss per share as the
effect would be anti-dilutive.
RECENTLY ISSUED ACCOUNTIGN PRONOUNCEMENTS
There were various accounting standards and interpretations issued in 2010,
none of which are expected to have a material impact on the Company's
financial position, operations or cash flows.
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
US GAAP, which contemplates continuation of the Company as a going concern.
However, the Company has negative working capital and stockholders' deficits,
and has incurred net losses, which raises substantial doubt about its ability
to continue as a going concern. In view of these matters, realization of
certain of the assets in the accompanying balance sheet is dependent upon its
ability to meet its financing requirements, raise additional capital, and the
success of its future operations. There is no assurance that future capital
raising plans will be successful in obtaining sufficient funds to assure its
eventual profitability. Management believes actions planned and presently
being taken provide the opportunity for the Company to continue as a going
concern, including:
* Increasing prices of products;
* Reducing discounts and free samples;
* Obtaining manufacturers which have substantially decreased
manufacturing costs, and
* Securing additional working capital through additional sales of debt
or equity to investors.
The financial statements do not include any adjustments that might result
from these uncertainties.
NOTE 4 - RELATED PARTY TRANSACTIONS
Certain members of the Company have utilized personal credit cards owned by
them and immediate family members to assist in financing its operations. As
of September 30, 2010 the Company owed $8,880 on these credit cards. The
balance owed at September 30, 2010 represents an amount owed to the Company's
President. The Company does not plan to use such credit in the future.
11
As of September 30, 2010, the Company has a payable of $37,649 due to
investors who paid various legal and accounting fees and other administrative
expenses on behalf of the company.
NOTE 5 - NOTES PAYABLE
Convertible notes payable $ 680,000
Less discount (89,210)
-----------
Convertible notes discount, net 590,790
Original issue discount notes 187,500
Unsecured notes payable 30,000
-----------
Total Notes Payable $ 808,290
===========
Convertible Notes Payable
During the nine months ended September 30, 2010, the Company sold convertible
secured promissory notes ("convertible notes") in the amount of $446,000 to
various investors. All the convertible notes accrue interest at 8% per annum
and are convertible to common stock by the note holder under terms designed
in the convertible note agreements which are either to (1) provide the holder
with a dollar amount of common stock equal to a designated percentage of the
note amount plus any accrued interest, ranging from 120% to 350% or (2)
convertible at 60% of the average market price (as defined in the agreement).
In accordance with ASC 470, the conversion terms are considered beneficial
conversion features, and as such for the nine months ended September 30,
2010, the Company recorded an additional debt discount of $426,000
representing the intrinsic value of the beneficial conversion features. The
debt discount is being accreted to interest expense over the term of the
convertible notes. All the convertible notes are collateralized by all the
assets of the Company and have maturity dates ranging from March 2010 to June
2011. On September 21, 2010, the Company issued 100,000 shares of common
stock as consideration for extension of the maturity dates of $200,000 of the
convertible notes where 50% of each loan is payable on September 15, 2010 and
50% payable on November 1, 2010. See Note 6 for further discussion.
Convertible notes totaling $320,000 have matured as of September 30, 2010 and
are currently in default. As of the date of this report, none of the note
holders have presented demands for payment or conversion notices to the
Company.
At September 30, 2010, the total interest accrued on the convertible notes,
net of amounts previously converted, was $30,146. For the three and nine
months ended September 30, 2010 a total of $118,286 and $675,137,
respectively, of the debt discount was accreted and is included in interest
expense in the accompanying consolidated statements of operations.
During the nine months ended September 30, 2010, convertible notes totaling
$663,500, together with $29,826 of accrued interest, and $129,289 of un-
accreted discounts on the convertible notes converted, were converted to
1,821,029 shares of the Company's common stock.
Original Issue Discount Notes
In February 2010, the Company issued two Original Issue Discount Secured
Promissory Notes (the "OID Notes") to two accredited investors. The first OID
12
Note was issued on February 18, 2010 with a face value of $125,000 and
maturity date of May 18, 2010. The second Note was issued on February 26,
2010 with a face value of $62,500 and a maturity of May 26, 2010. The OID
Notes are secured by all the Company's accounts receivable. The total
proceeds from the issuance of the OID Notes were $150,000. The discount of
$37,500 was amortized to interest expense over the life of the OID Notes.
For the nine months ended September 30, 2010, $37,500 of the discount was
amortized and is included in interest expense in the accompanying
consolidated statement of operations. At September 30, 2010, the OID Notes
are in default and the Company is in discussion with the OID Notes' holders
to extend the maturity dates.
As prescribed in the OID Note agreements the investors who purchase the OID
Notes also will receive one share of common stock for each $3.00 invested. As
such, during the nine months ended September 30, 2010, the Company issued
50,000 shares of common stock to the OID Note holders. For the three and nine
months ended September 30, 2010, the fair value of the common stock of
$30,500 was recorded to interest expense.
Unsecured Notes Payable
During the nine months ended September 30, 2010, the Company issued unsecured
notes payable to an investor in the aggregate of $648,000. These notes bear
interest at the rate of 8% per year and require no periodic principal or
interest payments. The notes mature on March 31, 2011 and June 29, 2011 at
which times all unpaid principal and interest is due. On September 29, 2010,
the Company issued 1,890,571 shares of common stock for forgiveness of
$661,700, the aggregate amount of these unsecured notes payable plus accrued
interest. As a result, for the three and nine months ending September 30,
2010, the Company recorded a loss from extinguishment of debt of $378,114,
included in other expense in the accompanying consolidated statement of
operations.
The Company has short term uncollateralized promissory notes in the amount of
$30,000 (the "promissory notes") The promissory notes accrue interest at 10%
per annum, require no periodic payments, and matured on March 2, 2010. On
May 5, 2010, the Company issued 30,000 shares of common stock as
consideration for an extension of the maturity date of the promissory notes
to September 2, 2010.
On September 29, 2010, the Company issued 75,000 shares of common stock for
forgiveness of $15,000 of the promissory notes, plus $1,625 accrued interest.
As a result, for the three and nine months ending September 30, 2010, the
Company recorded a loss from extinguishment of debt of $24,625, included in
other expense in the accompanying consolidated statement of operations. As
of September 30, 2010 the remaining promissory note is in default and is
currently being negotiated.
During the nine months ended September 30, 2010, the Company issued an
additional $15,000 uncollateralized promissory note (the "new promissory
note"). The new promissory note accrues interest at 8% per annum, requires
no periodic payments, and matures on June 30, 2011.
13
NOTE 6 - STOCKHOLDERS' DEFICIT
MusclePharm founders and initial investors
There were two initial founders of MusclePharm, both of whom are current
officers and directors of the Company. One founder received a 60% interest in
the original privately owned entity in exchange for his contribution of
formulations for potential products, contacts with GNC Canada and other
potential customers, and contacts with professional athletes. The other
initial founder received a 40% interest in the original privately owned
entity in exchange for his contacts with key contacts including potential
distributors, professional athletes and potential investors. No accounting
value was placed on these respective contributions since it was considered
immaterial.
During 2008 and 2009, MusclePharm sold to various other investors' equity
interests totaling $562,000 to provide working capital during its
development. These other investor equity interests represented a 10%
interest at the time of the share exchange. Upon completion of the share
exchange, the original founders of MusclePharm received 23,377,782 shares of
the Tone in Twenty's common stock, with the other equity investors receiving
a total of 2,622,218 shares of Tone in Twenty's common stock, for a total of
26,000,000 shares issued in the share exchange to the MusclePharm equity
interests.
Series A Convertible Preferred Stock
As of September 30, 2010, the Company has issued 83,333 shares of Series A
Convertible Preferred Stock ("Convertible Preferred Stock"). The Convertible
Preferred Stock is non-voting, and has no dividend or liquidation rights.
Each share is convertible into two hundred (200) shares of Common Stock,
provided, however, no holder of the Convertible Preferred Stock will have the
right to convert any of such shares to the extent that after giving effect to
such conversion, the beneficial owner of such shares would beneficially own
in excess of 4.9% of the shares of the common stock outstanding immediately
after giving effect to such conversion.
During the nine months ended September 30, 2010, 72,931 shares of the
Convertible Preferred Stock were converted into 14,586,200 shares of the
Company's common stock. At September 30, 2010, the Company had 10,402
outstanding shares the Convertible Preferred Stock which were convertible
into 2,080,400 shares of common stock (without giving effect to the
aforementioned limitation on conversion).
Common Stock
Immediately prior to the share exchange, Tone in Twenty had 437,500 shares
issued and outstanding. Concurrent with the share exchange, MusclePharm
purchased a total of 366,662 shares of the outstanding common stock owned by
a prior executive of Tone in Twenty for total consideration of $25,000.
These shares were subsequently retired. With the issuance of 26,000,000
shares of common stock to the MusclePharm founders and equity investors as
discussed above, immediately after the completion of the share exchange, the
Company had 26,070,838 shares issued and outstanding.
During the nine months ended September 30, 2010, the Company's two founders
and executive officers surrendered an aggregate of 2,425,000 shares of common
14
stock. The surrendered shares were immediately re-issued to various
individuals who had provided services to the Company during its development,
and to certain athletes as a component to their endorsement agreements with
the Company. Absent market data, the fair value of the shares was determined
to be $0.54 per share based on conversion terms of convertible debt issuances
and considering other issuances of common stock including the private
placement as discussed in subsequent events below. As a result, for the nine
months ended September 30, 2010, the Company recorded expenses of $1,039,500
with $54,000 recorded in advertising and promotion expense and $985,500
recorded in professional fees in the accompanying consolidated statement of
operations. In addition, $270,000 was recorded to services prepaid with
common stock as part of an unearned endorsement agreement. The endorsement
agreement begins on June 1, 2010 and expires on May 31, 2011, and as such
will be earned ratably over the term of the agreement. For the nine months
ended September 30, 2010, the company recorded $90,000 of advertising and
promotion expense related to this endorsement agreement.
Also during the nine months ended September 30, 2010, the Company issued
2,941,215 shares of common stock for services. As a result, for the nine
months ended September 30, 2010, the Company recorded expenses of $2,204,375
with $1,072,740 recorded in advertising and promotion expense, $1,029,135
recorded in professional fees and $102,500 recorded in research and
development in the accompanying consolidated statement of operations. The
advertising and promotion expense of $1,072,740 included $731,290 related to
endorsement agreements, $312,000 relates to stock issued to the manufacturer
and a customer to build relationships and $29,450 for print advertising. In
addition, $633,423 was recorded to services prepaid with common stock related
to unearned endorsement agreements with advertising and promotion expense
will be recognized ratably over the terms of the endorsement agreements. For
the nine months ended September 30, 2010, the company recorded $248,720 of
advertising and promotion expense related to these endorsement agreements.
During the nine months ended September 30, 2010, the Company issued 30,000
shares of common stock as consideration for an extension of the maturity date
of a promissory note and issued 100,000 shares of common stock as
consideration for extension of the maturity dates of certain convertible
notes. The common stock was valued at the price on the date of issuance which
was $95,500.
On September 21, 2010, the Company issued 50,000 shares of common stock to
the OID Note holders. The common stock was valued at the price on the date of
issuance which was $30,500.
On September 29, 2010, the Company issued 1,890,571 shares of common stock
for forgiveness of unsecured notes payable and accrued interest in the amount
of $661,700 and issued 75,000 shares of common stock for forgiveness of a
promissory note and accrued interest in the amount of $16,625. The common
stock was valued at the price on the date of issuance which was $1,081,064.
In May 2010, the Company entered into Subscription Agreements with accredited
investors in connection with the two private issuance and sales of 1,000,000
shares of the Company's common stock at $.50 per share (the "1,000,000 share
private placement") and 300,000 shares of the Company's common stock at $.35
per share (the "300,000 share private placement"). On June 30, 2010, the
Company's Board of Directors increased the number of shares under the 300,000
share private placement to 1,000,000 shares and then on September 30, 2010,
the Company's Board of Directors increased the number of shares under the
15
300,000 share private placement to 5,000,000 shares. As of September 30,
2010, the Company sold 90,000 shares under the 1,000,000 share private
placement and 2,174,407 shares under the 300,000 share private placement for
net proceeds of $793,192 (net of offering costs of $12,850).
On April 16, 2010 the Company's board of directors authorized the sale of up
to 2,000,000 units at $.50 per unit. Each unit consists of one share of the
Company's common stock, and one and one-half stock purchase warrants. Each
warrant is exercisable into one share of restricted common stock at an
exercise price of $1.50 per share, and expires five years after issuance. As
of September 30, 2010, the Company has sold 500,000 units in connection with
this offering for total gross proceeds of $250,000 (less offering costs of
$35,750), which was allocated to the common stock and warrants based on their
relative fair values.
The holder of the Company's Series A Convertible Preferred Stock is helping
to facilitate this offering by selling free trading shares of the Company's
common stock, which it owns by conversions of the preferred stock as
discussed above, to the investors in the same amount and at the same price as
the Company is selling the units. Related to this offering, the holder of
the preferred stock had received gross proceeds of $250,000 from the sale of
500,000 shares of common stock.
Warrants
As discussed above, during the nine months ended September 30, 2010, the
company issued common stock purchase warrants to acquire 750,000 shares of
common stock at $1.50 per share. The warrants were valued using the Black-
Scholes method. Under the Black-Scholes method using an expected life of 2.5
years, volatility of 70.5% to 74.8% and a risk-free interest rate of 0.8% to
1.2%, the Company determined the warrants had fair values of $.32 to $.44 as
of the date of the issuances. The relative fair value of the warrants of
approximately $76,715 was recorded as additional paid in capital.
A summary of warrant activity for the nine months ended September 30, 2010 is
as follows:
Warrants Weighted
Outstanding Average
and Exercisable Exercise Price
--------------- --------------
Warrants outstanding, January 1, 2010 - $ -
Warrants issued 750,000 1.50
Warrants expired/forfeited - -
--------------- --------------
Warrants outstanding, September 30, 2010 750,000 $1.50
=============== ==============
NOTE 7 - STOCK BASED COMPENSATION
On February 1, 2010 the Company's board of directors and shareholders
approved the 2010 Stock Incentive Plan ("2010 Plan"). The 2010 Plan allows
the Company to grant incentive stock options, non-qualified stock options,
restricted stock awards, restricted stock units and stock appreciation rights
to key employees and directors of the Company or its subsidiaries,
consultants, advisors and service providers. Any stock option granted in the
form of an incentive stock option will be intended to comply with the
16
requirements of Section 422 of the Internal Revenue Code of 1986, as amended.
Only stock options granted to employees qualify for incentive stock option
treatment. No incentive stock option shall be granted after February 1, 2020,
which is 10 years from the date the 2010 Plan was initially adopted. A stock
option may be exercised in whole or in installments, which may be cumulative.
Shares of common stock purchased upon the exercise of a stock option must be
paid for in full at the time of the exercise in cash or such other
consideration determined by the compensation committee. Payment may include
tendering shares of common stock or surrendering of a stock award, or a
combination of methods.
The 2010 Plan will be administered by the compensation committee. The
compensation committee has full and exclusive power within the limitations
set forth in the 2010 Plan to make all decisions and determinations regarding
the selection of participants and the granting of awards; establishing the
terms and conditions relating to each award; adopting rules, regulations and
guidelines; and interpreting the 2010 Plan. The Compensation Committee will
determine the appropriate mix of stock options and stock awards to be granted
to best achieve the objectives of the Plan. The 2010 Plan may be amended by
the Board or the compensation committee, without the approval of
stockholders, but no such amendments may increase the number of shares
issuable under the 2010 Plan or adversely affect any outstanding awards
without the consent of the holders thereof. The total number of shares that
may be issued shall not exceed 5,000,000, subject to adjustment in the event
of certain recapitalizations, reorganizations and similar transactions.
Stock options
On April 2, 2010 the Company's board of directors authorized the issuance of
a total of 2,767,500 stock purchase options. The grant consisted of 2,250,000
of non-qualified stock options and 517,500 incentive stock options. All the
stock options were issued to current employees, are exercisable at $.50 per
share, vest immediately, and expire on April 2, 2015. The fair value of each
option grant during the nine months ended September 30, 2010 was estimated on
the grant date using the Black-Scholes option-pricing model with an expected
life of 2.5 years, volatility of 74.8% and a risk-free interest rate of 1.4%.
The weighted average fair value of the options granted in the nine months
ended September 30, 2010 was $0.23. At September 30, 2010, all of the
2,767,500 stock options were exercisable.
A summary of stock option activity for the nine months ended September 30,
2010 is as follows:
Number of Weighted Average
Shares Exercise Price
----------- ----------------
Options outstanding, February 1, 2010 - $ -
Options granted 2,767,500 0.50
Options exercised - -
Options expired/forfeited - -
----------- ----------------
Options outstanding, September 30,
2010 2,767,500 $0.50
=========== ================
For the nine months ended September 30, 2010, compensation expense of
$630,990 was recorded related to the stock options.
17
NOTE 8 - COMMITMENTS AND CONTINGENCIES
As a component of the Company's overall marketing strategy, it has entered
into various sponsorship and endorsement agreements with professional
athletes, fitness trainers, and other high profile individuals. These
agreements generally provide for payments to the athletes and trainers based
on pre-determined events in which the athlete or trainer agree to provide
exposure of the Company and its products through media exposure and coverage
of specific athletic events. Some agreements are not contingent upon the
completion of pre-determined events, and as such are expensed ratably over
the period of the agreement. During the three and the nine months ended
September 30, 2010, the Company recorded expenses of $829,393 and $2,510,010
related to these agreements which are included in advertising and promotion
expense in the accompanying consolidated statements of operations. At
September 30, 2010 the Company estimates future obligations under its
existing sponsorship and endorsement agreements is approximately $730,000
assuming all contingencies contained in the agreements occur, of which there
can be no assurance. This estimate does not include amounts for
reimbursements for travel and expenses that are included in certain of the
agreements.
In August 2010, the Company entered into a long-term non-cancelable operating
lease agreement to lease approximately 30,302 square feet of space. The lease
is effective as of August 1, 2010 and expires on December 31, 2015. Under the
lease agreement, rent escalation is $0.20 per square foot per year and
provides five months of rent abatement. Future minimum rental payments by
year and in the aggregate, under non-cancelable operating leases with initial
or remaining terms of one year of more, consisted of the following as of
September 30, 2010:
2010 (3 months) $ 13,383
2011 66,917
2012 86,361
2013 92,421
2014 98,481
2015 104,542
--------
Total minimum operating lease payments $462,105
========
At September 30, 2010 the Company has accrued a liability of approximately
$255,923 representing delinquent payroll taxes. The Company plans to resolve
this liability with the appropriate agencies, but no resolution of these
matters has occurred as of the date of this report. A contingency exists
with respect to this matter, the ultimate resolution of which can not
presently be determined.
In April 2010, the Company entered into a factoring agreement (the
"Agreement") with FT Trade Financial Corp ("FT Trade"). Under the Agreement
the Company sells its accounts receivables to FT Trade who in return advances
cash of approximately 85% of the total amount of the accounts receivable
factored. FT Trade retains 15% of the outstanding factored accounts
receivable as a reserve, which it holds until the customer pays the factored
invoice to FT Trade. The Company pays fees for this service to FT Trade. For
the three and nine months ended September 30, 2010, the Company has
recognized losses on the sale of accounts receivable of $51,644 and paid fees
18
of $5,963 related to the sale of approximately $266,880 of accounts
receivables.
NOTE 9 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date which the
financial statements were available to be issued. In addition to events as
described elsewhere in this report, the following subsequent events are
noted.
Subsequent to September 30, 2010, the Company issued 1,901,117 shares of
common stock under the 300,000 share private placement, 1,216,200 shares of
common stock were issued for services and 10,000,000 shares of common stock
were issued to two executive officers as bonuses.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical facts are
forward-looking statements such as statements relating to future operating
results, existing and expected competition, financing and refinancing sources
and availability and plans for future development or expansion activities and
capital expenditures. Such forward-looking statements involve a number of
risks and uncertainties that may significantly affect our liquidity and
results in the future and, accordingly, actual results may differ materially
from those expressed in any forward-looking statements. Such risks and
uncertainties include, but are not limited to, those related to effects of
competition, leverage and debt service financing and refinancing efforts, and
general economic conditions. The following discussion and analysis should be
read in conjunction with the financial statements and notes thereto included
elsewhere in this report.
Acquisition
On February 18, 2010, in accordance with a Securities Exchange Agreement
dated February 1, 2010, Tone in Twenty, a Nevada Corporation, acquired all
the outstanding equity and voting interests of Muscle Pharm, LLC
("MusclePharm"), a Colorado limited liability corporation formed on April 22,
2008), for an aggregate of 26,000,000 shares of our common stock. In
addition, pursuant to the terms and conditions of the Securities Exchange
Agreement ("share exchange"), MusclePharm paid $25,000 to the former
president of Tone in Twenty for his 366,662 shares of common stock, and these
shares were cancelled. Upon closing of the transaction, MusclePharm became a
wholly owned subsidiary of Tone in Twenty. Also concurrent with the closing
of the acquisition, the Tone in Twenty's President and Director issued his
resignation. The board of directors was reconstituted to consist of the two
original founders and initial members of MusclePharm. Following the share
exchange and related transactions, a total of 26,070,838 shares of Tone in
Twenty's common stock was issued and outstanding, with MusclePharm members
owning approximately 99.7% of the outstanding common stock. The share
exchange is being accounted for as a "reverse acquisition," as the members of
MusclePharm owned a majority of the outstanding shares of Tone in Twenty
common stock immediately following the share exchange and now control the
board of directors. Tone in Twenty was deemed to be the legal acquirer in
the reverse acquisition, while MusclePharm was deemed to be the accounting
acquirer. Also, as a result of the completion of the reverse acquisition,
Tone in Twenty amended its articles of incorporation to change its name to
MusclePharm Corporation (the "Company"), and also changed its fiscal year
from August 31 to December 31. Upon completion of the share exchange, the
operations of Tone in Twenty ceased.
The consolidated financial statements are presented as a continuation of the
financial statements of MusclePharm. As such, for all disclosures
referencing shares authorized, issued, outstanding, per share amounts and
other disclosures related to equity, amounts have been retroactively adjusted
to reflect the legal capital of the legal acquirer (Tone in Twenty).
Overview
We are a sports nutrition company. We currently manufacture and market eight
branded sports nutrition products, designed to meet the nutritional needs of
20
athletes of all experience levels. Our products, Assault[TM], Battle
Fuel[TM], Bullet Proof[R], Combat Powder[R], Energel Shot[TM], MuscleGel[TM],
Recon[R], and Shred Matrix[TM], are comprised of safe, naturally occurring
food supplement ingredients, including amino acids, herbs and proteins. Each
of our high-performance nutritional supplements was designed to safely and
naturally enhance the effects of exercise, repair muscles, and to nourish the
body to optimize overall health and fitness of the active individual.
All of the products we sell are sold under the MusclePharm brand, and are
designed and marketed to target athletes, body builders and health minded
individuals seeking a high degree of physical fitness. Our products fall into
the general definition of vitamins, minerals, herbs and dietary supplements
and are regulated by the U.S. Food and Drug Administration (FDA). Each
product undergoes the scrutiny of our 6-Stage Research and Testing Protocol,
involving our vast resources of scientific, clinical and real-world
expertise, to ensure the highest level of efficacy and quality possible.
Our Medical Advisory Team includes two of the leading sports nutrition
clinician/researchers in the world, who contribute directly to the
formulation and development and testing of all products. Our Chief Medical
Director and Formulator is Dr. Eric Serrano, MD; and our Chief Medical
Researcher is Dr. Jeffrey Stout, Ph.D., researcher and professor of exercise
physiology at the University of Oklahoma. Dr. Ron Sekura, will join the board
of directors as the Director of Therapeutic Research. Dr. Sekura will be
assisting in the development of the Company's therapeutic indication and
application for patients with HIV experiencing catabolic cachexia.
MusclePharm products are currently available through several distribution
channels throughout the U.S. and 120 countries worldwide. The larger
distribution channels include over 1000 GNC locations, over 400 Vitamin
Shoppes, the largest international sports nutrition distributors Sportika and
several independent sports nutrition retail outlets and fitness centers. Our
products are also available on over 100 Internet sites.
Our marketing strategy entails the branding of MusclePharm as the "must-have"
nutritional supplement line for serious, high performance athletes.
Endorsements have been completed with several Mixed Martial Arts fighters,
Rashad Evans and Lyoto Machida, bodybuilding, fitness professionals, and
current NFL notables, Joey Porter, Chris Johnson and Shawne Merriman.
Another endorsement agreement is TJ Lavin as the host of MTV's Real World.
Additionally, endorsement agreements are currently being negotiated with
several other athletes of high-visibility and notoriety. We believe that
top-level athletes from all sports are viewed as leaders and role models to
many people. The objective of our athlete endorsement program is to build
consumer awareness and confidence in the MusclePharm brand to help drive
consumer demand for our products in retail outlets and health clubs.
At Musclepharm, we believe we are a look at the future where science meets
sports nutrition. From the laboratory to the playing field, our products are
held to the most rigorous standards, because the expectations of our
customers are high. Our products contain no banned substances, are 100%
hardcore, and proven effective. MusclePharm is currently in the approval
process for NSF certification, which will allow us to sell our products to
professional and college sports teams nationwide. Our manufacturing facility
is GMP compliant and EU certified and our processes stand up to the most
stringent industry standards. We firmly believe in our mission: to improve
our customer's lives, increase their ability to excel, utilize cutting-edge
21
science to develop the best nutritional supplements on the market, and to
provide a safe option for athletes of all levels seeking to be the best
athlete they can be. We are MusclePharm, The Athlete's Company[TM].
Liquidity and Capital Resources
Our primary source of operating cash has been through the sale of equity and
through the issuance of convertible secured promissory notes and other short
term debt as discussed below.
At September 30, 2010, the Company had cash of $10,657 and a working capital
deficit of $2,578,866, compared to overdrawn bank accounts of $17,841 and a
working capital deficit of $1,223,074 at December 31, 2009. The working
capital deficit increase of $1,355,792 is primarily attributed to the
operating losses incurred for the nine months ended September 30, 2010.
Cash used in operating activities was $2.4 million for the nine months ended
September 30, 2010, as compared to cash used in operating activities of $0.4
million for the nine months ended September 30, 2009. The increase in cash
used in operating activities for the nine months ended September 30, 2010
compared to the nine months ended September 30, 2009 was primarily the result
of the net operating loss net of non-cash expenses, for the current nine
month period.
Cash used in investing activities was $30,395 for the nine months ended
September 30, 2010, as compared to cash used in investing activities of
$5,510 for the nine months ended September 30, 2009. The increase in cash
used in investing activities represents purchases of various fixed assets.
We also maintain a website http://www.musclepharm.com), designed for
customers and investors. Future investments in equipment and other fixed
assets, as well as further development of our Internet presence will largely
depend on available capital resources.
Cash flows provided by financing activities were $2.4 million for the nine
months ended September 30, 2010, as compared to cash flows provided by
financing activities of $0.4 million for the nine months ended September 30,
2009.
In February 2010, the Company issued two Original Issue Discount Secured
Promissory Notes (the "OID Notes") to two accredited investors. The first OID
Note was issued on February 18, 2010 with a face value of $125,000 and
maturity date of May 18, 2010. The second Note was issued on February 26,
2010 with a face value of $62,500 and a maturity of May 26, 2010. The OID
Notes are secured by all the Company's accounts receivable. The total
proceeds from the issuance of the OID Notes were $150,000. The discount of
$37,500 was amortized to interest expense over the life of the OID Notes.
For the nine months ended September 30, 2010, $37,500 of the discount was
amortized and is included in interest expense in the accompanying
consolidated statement of operations. At September 30, 2010, the OID Notes
are in default and the Company is in discussion with the OID Notes' holders
to extend the maturity dates.
During the nine months ended September 30, 2010, the Company sold convertible
secured promissory notes ("convertible notes") in the amount of $446,000 to
various investors. All the convertible notes accrue interest at 8% per annum
and are convertible to common stock by the note holder under terms designed
in the convertible note agreements which are either to (1) provide the holder
22
with a dollar amount of common stock equal to a designated percentage of the
note amount plus any accrued interest, ranging from 120% to 350% or (2)
convertible at 60% of the average market price (as defined in the agreement).
All the convertible notes are collateralized by all the assets of the Company
and have maturity dates ranging from March 2010 to June 2011. On September
21, 2010, the Company issued 100,000 shares of common stock as consideration
for extension of the maturity dates of $200,000 of the convertible notes
where 50% of each loan is payable on September 15, 2010 and 50% payable on
November 1, 2010. Convertible notes totaling $320,000 have matured as of
September 30, 2010 and are currently in default. As of the date of this
report, none of the note holders have presented demands for payment or
conversion notices to the Company.
During the nine months ended September 30, 2010, convertible notes totaling
$663,500, together with $29,826 of accrued interest, and $129,289 of un-
accreted discounts on the convertible notes converted, were converted to
1,821,029 shares of the Company's common stock.
During the nine months ended September 30, 2010, the Company issued unsecured
notes payable to an investor in the aggregate of $648,000. These notes bear
interest at the rate of 8% per year and require no periodic principal or
interest payments. The notes mature on March 31, 2011 and June 29, 2011 at
which times all unpaid principal and interest is due. On September 29, 2010,
the Company issued 1,890,571 shares of common stock for forgiveness of
$661,700, the aggregate amount of these unsecured notes payable plus accrued
interest. As a result, for the three and nine months ending September 30,
2010, the Company recorded a loss from extinguishment of debt of $378,114,
included in other expense in the accompanying consolidated statement of
operations.
The Company has short term uncollateralized promissory notes in the amount of
$30,000 (the "promissory notes") The promissory notes accrue interest at 10%
per annum, require no periodic payments, and matured on March 2, 2010. On
May 5, 2010, the Company issued 30,000 shares of common stock as
consideration for an extension of the maturity date of the promissory notes
to September 2, 2010.
On September 29, 2010, the Company issued 75,000 shares of common stock for
forgiveness of $15,000 of the promissory notes, plus $1,625 accrued interest.
As a result, for the three and nine months ending September 30, 2010, the
Company recorded a loss from extinguishment of debt of $24,625, included in
other expense in the accompanying consolidated statement of operations. As
of September 30, 2010 the remaining promissory note is in default and is
currently being negotiated.
During the nine months ended September 30, 2010, the Company issued an
additional $15,000 uncollateralized promissory note (the "new promissory
note"). The new promissory note accrues interest at 8% per annum, requires
no periodic payments, and matures on June 30, 2011.
On April 16, 2010 the Company's board of directors authorized the sale of up
to 2,000,000 units at $.50 per unit. Each unit consists of one share of the
Company's common stock, and one and one-half stock purchase warrants. Each
warrant is exercisable into one share of restricted common stock at an
exercise price of $1.50 per share, and expires five years after issuance. As
of September 30, 2010, the Company has sold 500,000 units in connection with
23
this offering for total gross proceeds of $250,000 (less offering costs of
$35,750).
In May 2010, the Company entered into Subscription Agreements with accredited
investors in connection with the two private issuance and sales of 1,000,000
shares of the Company's common stock at $.50 per share (the "1,000,000 share
private placement") and 300,000 shares of the Company's common stock at $.35
per share (the "300,000 share private placement"). On June 30, 2010, the
Company's Board of Directors increased the number of shares under the 300,000
share private placement to 1,000,000 shares and then on September 30, 2010,
the Company's Board of Directors increased the number of shares under the
300,000 share private placement to 5,000,000 shares. As of September 30,
2010, the Company sold 90,000 shares under the 1,000,000 share private
placement and 2,174,407 shares under the 300,000 share private placement for
net proceeds of $793,192 (net of offering costs of $12,850).
On September 29, 2010, the Company issued 1,890,571 shares of common stock
for forgiveness of unsecured notes payable and accrued interest in the amount
of $661,700 and issued 75,000 shares of common stock for forgiveness of a
promissory note and accrued interest in the amount of $16,625. The common
stock was valued at the price on the date of issuance which was $1,081,064.
Three Months Ended September 30, 2010 Compared to Three Months Ended
September 30, 2009
Revenues from the sale of products, net were $1.4 million for the three
months ended September 30, 2010 as compared to revenues from the sale of
products of $0.2 million for the three months ended September 30, 2009.
Sales during the three months ended September 30, 2010 increased due to the
change in manufacturers which provided more consistent shipments to customers
and to the increase in advertising and promotion.
Cost of sales for the three months ended September 30, 2010 were $0.9 million
or 66% of revenue as compared to $0.2 million or 107% of revenue for the
three months ended September 30, 2009. The cost of goods sold as percent of
revenue decreased due to the change in manufacturers as we begin to realize
savings offered for quantity discounts.
Operating Expenses for the three months ended September 30, 2010 were $2.8
million as compared to $0.6 million for the three months ended September 30,
2009. The $2.2 million increase is largely due to the increase in
advertising and promotion of approximately $0.8 million and an increase in
professional fees of approximately $1.0 million. For the three months ended
September 30, 2010, $0.3 million was included in advertising and promotion
and $1.0 million was included in professional fees for the value of stock
issued for services.
Operating Loss for the three months ended September 30, 2010 was $2.3 million
as compared to $0.6 million for the three months ended September 30, 2009.
Interest expense for the three months ended September 30, 2010 was $0.2
million as compared to $4,669 for the three months ended September 30, 2009.
The increase in interest expense primarily relates to amortization of the
debt discount of $0.1 million and interest on the convertible debts of
$70,760.
24
Other expense for the three months ended September 30, 2010 was $0.4 million
as compared to $0 for the three months ended September 30, 2009. The
increase in other expense is primarily due to loss on extinguishment of debt
of $0.4 million.
Net Loss for the three months ended September 30, 2010 was $2.9 million or
loss per share of $.08 as compared to the net loss of $0.6 million or loss
per share of $.02 for the three months ended September 30, 2009.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September
30, 2009
Revenues from the sale of products, net were $3.1 million for the nine months
ended September 30, 2010 as compared to revenues from the sale of products of
$0.7 million for the nine months ended September 30, 2009. Sales during the
nine months ended September 30, 2010 increased due to the change in
manufacturers which provided more consistent shipments to customers and to
the increase in advertising and promotion.
Cost of sales for the nine months ended September 30, 2010 were $2.1 million
or 68% of revenue as compared to $0.5 million or 79% of revenue for the nine
months ended September 30, 2009. The cost of goods sold as percent of
revenue decreased due to the change in manufacturers as we begin to realize
savings offered for quantity discounts.
Operating Expenses for the nine months ended September 30, 2010 were $8.4
million as compared to $1.2 for the nine months ended September 30, 2009.
The $7.3 million increase is largely due to an increase in adverting and
promotion of approximately $3.5 million, an increase in professional fees of
approximately $2.1 million and an increase in salaries and benefits of
approximately $1.3 million. For the nine months ended September 30, 2010,
$1.1 million was included in advertising and promotion and $2.0 million was
included in professional fees for the value of stock issued for services.
Operating Loss for the nine months ended September 30, 2010 was $7.4 million
as compared to $1.0 million for the nine months ended September 30, 2009.
Interest expense for the nine months ended September 30, 2010 was $0.9
million as compared to $8,608 for the nine months ended September 30, 2009.
The increase in interest expense primarily relates to amortization of the
debt discount of $0.7 million and interest on the convertible debts of $0.1
million.
Other expense for the nine months ended September 30, 2010 was $0.4 million
as compared to $0 for the nine months ended September 30, 2009. The increase
in other expense is primarily due to loss on extinguishment of debt of $0.4
million.
Net Loss for the nine months ended September 30, 2010 was $8.7 million or
loss per share of $.28 as compared to the net loss of $1.0 million or loss
per share of $.04 for the nine months ended September 30, 2009.
Inflation did not have a material impact on the Company's operations for the
period. Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's results of operations.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reported period.
Actual results could differ materially from those estimates. The Company's
significant estimates made in connection with the preparation of the
accompanying financial statements include allowance for doubtful accounts,
value of long lived assets and the valuation of stock options and warrants.
Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's liquidity and capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
Our chief executive officer and chief financial officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) promulgated under the Exchange Act). Disclosure controls and procedures
are designed to provide reasonable assurance that the information required to
be disclosed by the Company in reports that it files under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC and to ensure that information
required to be disclosed by the Company is accumulated and communicated to
the Company's management as appropriate to allow timely decisions regarding
required disclosure. Based on their evaluation of our disclosure controls
and procedures as of the end of the period covered by this Quarterly Report
on Form 10-Q, the Certifying Officers have concluded that due to certain
design deficiencies, the Company's disclosure controls and procedures are not
effective. The Company is currently reviewing those deficiencies and
formulating plans for remediation. Notwithstanding our conclusions, the
Certifying Officers do not believe that these deficiencies have resulted in
deficient financial reporting because the chief financial officer is aware of
his responsibilities under the SEC's reporting requirements and personally
certifies financial reports.
(b) Changes in Internal Control over Financial Reporting
On February 18, 2010 in accordance with a Securities Exchange Agreement
("share exchange") dated February 1, 2010, the Company completed a reverse
acquisition as discussed in more detail elsewhere in this report. As a
result of the reverse acquisition, all previous management and accounting
systems of the legal acquirer (Tone in Twenty) were replaced by the
management and accounting systems of the accounting acquirer (Muscle Pharm,
26
LLC). In addition to the Certifying Officers' conclusion that our disclosure
controls and procedures are not effective, management has identified the
following material weaknesses in the design of the Company's internal
controls over financial reporting. First, the Company has installed
accounting software that does not prevent erroneous or unauthorized changes
to previous reporting periods and does not provide an adequate audit trail of
entries made in the accounting software. Second, due to insufficient numbers
of personnel, certain duties including cash management and accounts
receivable have not been appropriately segregated. These material weaknesses
were first identified by our chief financial officer after the share exchange
and as a result of us becoming a public reporting company, we are discussing
a remediation plan for these control deficiencies and will implement such a
plan when resources allow.
(c) Limitations of any Internal Control Design
Our certifying officers do not expect that our disclosure controls or
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute assurance that the objectives of the system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented if there exists in an
individual a desire to do so. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
Not Applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In May 2010, the Company entered into Subscription Agreements with accredited
investors in connection with the two private issuance and sales of 1,000,000
shares of the Company's common stock at $.50 per share (the "1,000,000 share
private placement") and 300,000 shares of the Company's common stock at $.35
per share (the "300,000 share private placement"). On June 30, 2010, the
Company's Board of Directors increased the number of shares under the 300,000
share private placement to 1,000,000 shares and then on September 30, 2010,
the Company's Board of Directors increased the number of shares under the
300,000 share private placement to 5,000,000 shares. As of September 30,
2010, the Company sold 90,000 shares under the 1,000,000 share private
placement and 2,174,407 shares under the 300,000 share private placement for
net proceeds of $793,192 (net of offering costs of $12,850). These shares
were sold without registration under the Securities Act of 1933, as amended
(the "Act"), or state securities laws, in reliance on the exemptions provided
by Section 4(2) of the Act and Regulation D promulgated thereunder. Because
the common stock has not been registered, such shares may not be sold,
transferred, assigned or otherwise dispose of by the investors absent
registration or an applicable exemption from registration requirements, such
as the exemption afforded by Rule 144 under the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS.
Exhibit No. Description
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-
14(a) or Rule 15d-14(a) - Filed herewith electronically
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-
14(a) or Rule 15d-14(a) - Filed herewith electronically
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 - Filed herewith electronically
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 - Filed herewith electronically
28
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MUSCLEPHARM CORPORATION
Date: November 15, 2010 By:/s/ Brad J. Pyatt
Brad J. Pyatt, Chief Executive Officer
By:/s/ Larry Meer
Larry Meer, Chief Financial Officer
29